PowerHouse Inc

Our mission: More efficient energy use for all

© Copyright Learning Dynamics 2017 All rights reserved.

Trading Period Two

Market Update & Breaking News
Read more>>>
 PowerHouse Inc
Our mission: More efficient energy use for all

Market Update

This has been an interesting period for the company. Concerns about the
Chinese economy have had a major impact on many sectors of the world
economy, especially those that rely on exports for a large percentage of their
business. Fortunately, the energy conservation sector is doing well under the
circumstances.

Awareness of the impact of climate change on the world has been heightened
by some very high-profile film stars and sports personalities choosing to build
zero-energy homes. A zero-energy building, is a building with zero net energy
consumption, meaning the total amount of energy used by the building on an
annual basis is roughly equal to the amount of renewable energy created on
the site. These buildings consequently do not increase the amount of
greenhouse gases in the atmosphere.

Meanwhile the government has increased funding for the development of low- The zero-energy home of
George Crooner and his wife
cost, zero-energy homes. Priority will be given to elderly people and people
with long-term sickness when these new homes are allocated through the
Health Through Warmth scheme run jointly with selected utility providers.

While PowerHouse is not in the business of building zero-energy homes, all the
publicity around energy conservation has been good for energy monitoring
suppliers. Both the Industrial market and the Wholesale market are predicted
to grow this trading period – though this will depend in part on how much
companies in the industry spend on marketing in the next six months.

PowerHouse Inc has seen increased competition over the last few months. The
business founders feel that PowerHouse needs to be seen as having a clear An example of the zero-
pricing strategy and have therefore instructed the Board of Directors to restrict energy homes available
through the Health Through
price changes from the last trading period to +/- £5 for both the Avocet Warmth Scheme
(Alpha) and Dunlin (Delta) products..

Sipho, Lily, Kate and Luca have also asked the Board of Directors to keep a close
watch on how the energy conservation market is changing, to identify market
trends and the opportunities and threats that these pose to PowerHouse. Also,
to be aware of how the costs of the business impact on its profitability.

Two of the major costs for the business are the cost of raw materials and
labour. If PowerHouse is to remain competitive, investment is essential in order
to bring down these costs.
 PowerHouse Inc
Our mission: More efficient energy use for all
Market Update

With this in mind, the Founders have agreed that the business should put together a project
team to look at ways of reducing the costs the business pays for both raw materials and labour.
The project team will work with specialist consultants from MBI, one of the world’s leading
consultancy firms, who will advise them on the best way for the business to negotiate better
terms with its raw materials supplier. If MBI can find a way to bring down the suppliers input
costs, the supplier can in turn pass on those cost savings to PowerHouse.

The project team and consultants will also look at how people are employed by PowerHouse.
Labour costs are predicted to rise by 10% this trading period due to new costs associated with
implementing legislation on employment rights. The project team will work with the consultants
to see how the business can reduce its labour costs while ensuring that the legislation is
implemented in the company’s Human Resources (HR) policies.

In order to employ the consultants and pay the project team’s salaries and expenses, the
Founders have suggested that the Board of Directors spend a minimum of £500,000 on cost
reduction when they make their decisions this trading period.

In terms of other investments, due to machines (plant) going out of service ( see depreciation in
your Simulation Participant’s Guide), PowerHouse will see 50,000 units of production capacity
disappearing at the end of Trading Period Two.

If the Board of Directors wishes to maintain or grow production capacity the decision needs to
be taken to acquire new plant.

Remember that plant acquired today will only increase production capacity in the next trading
period and not in Trading period 2.

Also, that additional production capacity means additional fixed costs (see Participant’s Guide).

Finally, that if you want to buy one extra plant with 10,000 units of capacity you put 65 (the
price of one machine ) on your decision form. For 20,000 units of additional production capacity
130, 100,000 units 650, etc.
 PowerHouse Inc
Our mission: More efficient energy use for all

Breaking News

Vanity Fair, USA edition

Could a bunch of Nigerian militants in speedboats bring about a U.S. recession?
Blowing up facilities and taking hostages, they are wreaking havoc on the oil production
of America’s fifth-largest supplier. Deep in the Niger-delta swamps, the author meets the
nightmarish result of four decades of corruption.

On September 23rd last year, a group of high-ranking government officials were convened in a
ballroom of the Four Seasons Hotel in Washington, D.C., to respond to a simulated crisis in the
global oil supply. The event was called “Oil ShockSim,” and it was organized by public-interest
groups concerned with energy policy and national security. Among those seated beneath a
.
wall-size map of the world were two former heads of the C.I.A., the president of the Council on
Foreign Relations, and a member of the Joint Chiefs of Staff.

The scenario they were handed was this:

Civil conflict breaks out in northern Nigeria—an area rife with Islamic militancy and religious
violence—and the Nigerian Army is forced to intervene. The situation deteriorates, and
international oil companies decide to end operations in the oil-rich Niger River delta, resulting in
a loss of 900,000 barrels a day on the world market. Since Nigerian oil is classified as “light
sweet crude,” meaning that it requires very little refining, this makes it a particularly painful loss
to the American market.

Concurrently, in this scenario, cold weather sweeping across the Northern Hemisphere is
boosting global demand by 850,000 barrels a day. Because global oil production is already
functioning at close to maximum capacity (around 84 million barrels a day), small disruptions in
supply shudder through the system very quickly. A net deficit of almost two million barrels a day
is a significant shock to the market, and the price of a barrel of oil rapidly goes to more than
$80.

The United States could absorb $80 oil almost indefinitely—people would drive less, for
example, so demand would decline—but the country would find itself in an extremely vulnerable
position. Not only does the American economy rely on access to vast amounts of cheap oil, but
the American military—heavily mechanized and tactically dependent on air power—literally runs
on oil.

Eighty-dollar oil would mean that there was virtually no cushion in the world market and that
any other disruption—a terrorist attack in Saudi Arabia, for example—would spike prices
through the roof.
 PowerHouse Inc
Our mission: More efficient energy use for all
Breaking News - Vanity Fair, USA edition
Nigeria's proven oil reserves are estimated by the United States Energy Information
Administration (EIA) at between 16 and 22 billion barrels (3.5×109 m3), but other sources
claim there could be as much as 35.3 billion barrels (5.61×109 m3). Its reserves make Nigeria
the tenth most petroleum-rich nation and by the far the most affluent in Africa. In mid-2015 its
crude oil production was averaging around 2.2 million barrels (350,000 m³) per day.

According to the Oil Shock Sim (OSS) panel, near-simultaneous terrorist attacks on oil
infrastructure around the world could easily send prices to $120 a barrel and those prices, if
sustained for more than a few weeks, would cascade disastrously through the American
economy. Gasoline and heating oil would rise to nearly $5 a gallon, which would force the
median American family to spend 16 percent of its income on gas and oil—more than double
the current amount. Transportation costs would rise to the point where many freight companies
would have to raise prices dramatically, cancel services, or declare bankruptcy. Fewer goods
would be transported to fewer buyers—who would have less money anyway—so the economy
would start to slow down. A slow economy would, in turn, force yet more industries to lay off
workers or shut their doors. All this could easily trigger a recession.

Less than seven months after the first Oil Shock Sim conference—almost as if they’d been
given walk-on parts in the simulation—several boatloads of heavily armed militants overran an
oil facility in the Niger delta and seized four Western oil workers. The author of this article went
to Nigeria to interview the militants. The militants said they were protesting the environmental
devastation caused by the oil industry, as well as the appalling conditions in which most delta
inhabitants live. There are no schools, medical clinics, or social services in most delta villages.
There is no clean drinking water in delta villages. There are almost no paying jobs in delta
villages. People eke out a living by fishing while, all around them, oil wells owned by foreign
companies pump billions of dollars’ worth of oil a year. It was time, according to the militants,
for this injustice to stop.

The Oil Shock Sim panel called for action on various fronts: investment into Nigeria based on
improving the quality of life of delta inhabitants via a levy on profits made by oil companies,
investment in energy conservation technologies and alternative energy technologies and
stock-piling of oil supplies in order to give the USA time to deal with any sudden hike in oil
prices. Despite the high profile of the OSS panel, there is little evidence of urgent action being
taken in the USA or indeed elsewhere in the world by governments in reaction to the OSS
report.

The immediate impact of this on PowerHouse is that Transport & Packaging costs have risen to £3
per unit. The longer term effect may be much more serious: a worldwide recession driven by higher
oil prices. But how will this impact on PowerHouse and others in the energy conservation business
longer-term?
 PowerHouse Inc
Our mission: More efficient energy use for all
Breaking News

PowerHouse Current Costs

Warehousing Costs £2 per unit

(see full cost calculation in Participant’s Guide)

Transport and packaging costs - £3 per unit

Corporation tax 30%

Bank Interest rate Interest on loans has risen to 10% due to economic
uncertainty and may rise again in the next few months.

Bad debts written off 5%

Competitive Information 20K per unit (see page 20 of Participant’s Guide)

Maximum Price changes from previous

trading period prices +/-£5

Note: there will be free competitor balance sheets sent to you as it is the end of the financial year.
To make it clear, you will get free competitor balance sheets but will need to order and pay for
both market sales prices and market research if you want this information.

Useful Economic Information

Corporation tax rates are unchanged at 30% and tax is payable this trading period as it is the end
of the financial year. See Data for Next Trading Period on your Management Report to see how
much you must pay.

Avocet (Alpha) and Dunlin (Delta) products contracts available:

50,000 Avocet (Alpha)

20,000 Dunlin (Delta)

Reminder: Check the rules on bidding for contracts (in your Participant’s Guide) before bidding for
one or both of these contracts.